Current account balances of directors and shareholders are not deposits, so interest paid on them escapes disallowance.

Interest paid by a company on credit balances in directors' and shareholders' current accounts was not disallowable under section 40A(8) because a mere current account balance is not a deposit. The court held that a deposit requires a distinct legal relationship and terms, and there was no evidence of any agreement treating the balances as deposits. Accordingly, the payments fell outside section 40A(8) and disallowance was not warranted.

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Issues: Whether interest paid by a company to its directors and shareholders on credit balances in their current accounts was liable to disallowance under section 40A(8) of the Income-tax Act, 1961, on the footing that such balances constituted deposits.

Analysis: The credit balances in the current accounts were held not in the capacity of depositors. A mere current account balance was held not to be a deposit, since a deposit carries a distinct legal relationship and terms. There was no evidence of any agreement treating those balances as deposits. The view taken by the Madhya Pradesh High Court in a similar case was followed.

Conclusion: The interest payments were not covered by section 40A(8), and no disallowance was warranted. The answer was against the Revenue and in favour of the assessee.

Ratio Decidendi: A mere credit balance in the current account of a shareholder or director is not a deposit for the purposes of section 40A(8) unless it is shown that the amount was held in the capacity of a depositor or was otherwise agreed to be treated as a deposit.

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